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An hour after the news broke that Hasbro had made a takeover approach to Mattel that would unite the world’s two largest toymakers, Mattel hosted a doll party.

Girls and parent chaperones made their way through 40,000 square feet of ritzy real estate devoted to American Girl, Mattel’s crown jewel luxury doll. The maker of Barbie is trying to resurrect its glamour, seeking to capture nostalgia for American Girl dolls that became ubiquitous in the 1990s, with the opening two weeks ago of a flagship store in New York’s Rockefeller Plaza.

But American Girl is under threat. After an era of stable growth, sales of the $115 doll slipped in 2015 and 2016, and are down 18 per cent so far this year. Mattel has had an equally torrid year, suspending its dividend last month after having lost a third of its stock value as sales dropped 10 per cent.

Privately owned Danish group Lego is also battling falling sales. Having grown to become the world’s most profitable toymaker in the $90bn global toy market, it reported its first sales slide in a decade in September as first-half revenues slipped 5 per cent.

The internet has upended toymakers’ decades-old business models, allowing cheap independent products such as fidget spinners and slime to usurp traditional big-budget rollouts. Such crazes can spread online in a matter of hours, while large-scale carefully planned launches take months.

Josh Loerzel, vice-president at Zing, an Oregon toy manufacturer that makes fidget spinners, says “this has flipped the script . . . it’s about how quickly you can react”.

In this environment Hasbro has been more spry, analysts say. The maker of Nerf guns has long played second fiddle to Mattel, but it is catching up. According to Bloomberg data, Hasbro is on track to surpass Mattel’s annual sales for the first time since 1993 and as investors have dumped Mattel, its market capitalisation has risen to almost double that of its rival at more than $11.8bn. Hasbro’s net revenues have climbed to $3.6bn in the year to date, up nearly 7 per cent from a year ago, compared with $3.3bn for Mattel.

Toy sales have been growing at a rate of about 3 per cent a year since 2011, according to market researchers NPD Group, although the business has become more unpredictable, leading toymakers to seek safety in film and television.

The strategy worked for Lego, which had great success with its Lego movie franchise after its first cinema release in 2014. Meanwhile, Hasbro has “evolved from being just a straight toy company to a global entertainment company”, says Chris Byrne, editor of trade publication Toys, Tots, Pets & More

. “That’s been the real distinction between [Hasbro and Mattel].”

“It’s a really cyclical business that is driven by the whims of an eight-year-old . . . movies are on some level viewed as a safer revenue stream,” he says. This year almost 30 toy lines were licensed from Hollywood films — three times that of last year. These tie-ups make up about 30 per cent of all toy sales, according to NPD.

Hasbro in 2015 began to develop Disney’s Princess dolls, snatching the business from Mattel which had owned the rights for two decades. This month Paramount Pictures struck a five-year production deal to make films and TV shows based on Hasbro toys, after the companies teamed up for the popular Transformers films.

With children glued to iPads and smartphones, Mattel is trying to launch itself into the 21st century. After two years of searching for a permanent chief executive, the company hired Margo Georgiadis, one of Google’s top advertising executives, to lead the company in a “rapidly evolving digital world”.

It is diversifying with the acquisition of wearable baby monitor Sproutling and plans to launch an interactive version of its Hot Wheels car. Mattel is also hoping the Hollywood playbook will augur its fortunes, preparing a line of dinosaur action figures to accompany the Jurassic World: Fallen Kingdom movie due for release in June. By comparison, Hasbro is poised to benefit from no fewer than eight Marvel films next year, including Black Panther and Avengers: Infinity War, alongside a Han Solo spin-off and the company’s very own Bumblebee film.

Mattel has also overhauled old brands. For instance, Barbie offers different body shapes, skin tones and cultural backgrounds. But critics say it has been too slow to make decisions and launch new products.

“The root problem we see is not that the company has too many [brands], but that it has too many bad ones,” says Gerrick Johnson, analyst at BMO. He adds that its turnround strategy is “heavy on consultant-speak and light on actual details”, but with a new management team, “sacred cows will be slayed”.

Mattel has cut brands and new launches by 30 per cent this year, with another 20 per cent planned next year. The company says that its corporate restructuring, which aims to slash $650m in costs, will help cut in half the time it takes to bring products to market.

Stephanie Wissink, analyst at Jefferies, says Mattel has an “identity crisis”. All of its business units except for entertainment have lost sales this year, including a 7 per cent drop for Barbie and an 11 per cent slide at Fisher-Price.

“Hasbro has a clear identity: media . . . what is Mattel?” she asks. Ms Georgiadis is moving towards technology, but this is a “big grey area” filled with privacy risks and the hefty costs of bringing products to market quickly.

Competition concerns and an “undervalued” offer prompted Mattel to rebuff Hasbro’s approach, according to a Reuters report last week. A tie-up would give the combined group control over 25 per cent of the global toy business, and 30 per cent of the US, which analysts caution could raise eyebrows with regulators.

The companies have flirted with a combination before, although Mattel’s stock plunge makes it more feasible. A merger could give the toymakers more negotiating power for shelf space and help them “weather the complex retail landscape more effectively”, says Ellen Itskovitz, analyst at Fitch.

The industry’s move deeper into film and content has raised speculation that Hasbro may not be the only suitor for Mattel. It could also draw bids from an entertainment company such as Disney or Viacom, says BMO’s Mr Johnson, who values Mattel’s brands at more than $10bn.

The prospect of consolidation follows Toys R Us filing for bankruptcy in September, a disruptive event that surprised even the retailer’s largest vendors. Both Hasbro and Mattel said the bankruptcy had hurt their sales in the third quarter, with Mattel, blaming it for more than half the North American revenue decline.

Until now, Mattel’s losses have been largely Hasbro’s gain, although investors indicate a tie-up could benefit both: Mattel’s stock has jumped by a third since reports of Hasbro’s interest.

As for American Girl, Ms Wissink says that while it is “the Louis Vuitton of toys”, it faces competition from cheaper unbranded rivals. “Consumers today are savvy and they are looking at face value versus the price. When you walk through these [American Girl] stores, you will see little girls bringing in a Walmart doll but she didn’t front the $115 purchase.”

Top of the tree

Barbie, invented by Ruth Handler in 1959, reigns supreme in the National Retail Federation’s US survey of “hot toys” for girls for a third year in a row as Christmas approaches. But closing in fast is Spin Master’s Hatchimals — the fuzzy toy that emerges from a plastic egg shell and is then cared for by its owners that pet it, feed it and teach it how to talk.

The survey of 7,439 consumers showed that for at least the seventh year running “everything is awesome” for Denmark’s Lego as it is expected to lead the list of toys for boys.

But Adobe Digital Insight’s predictions based on “social buzz” show somewhat different results. While the list included Barbie and Hatchimals, Hasbro’s Nerf Guns, Australian company Moose Toys’ miniature collectibles Shopkins, and Spin Master’s animated series-inspired Paw Patrol are expected to be top sellers.

And in the wake of Toys R Us bankruptcy the internet is also expected to play another crucial role — US online toy sales are projected to rise 24 per cent year on year, according to Adobe.

While the reports signal strong competition for Lego, Hasbro and Mattel from upstarts such as Spin Master and Moose Toys, analysts say that the key to sales is getting shoppers in the door earlier and more frequently. With Christmas this year falling on a Monday, many would-be Santas are likely to hold out for bargains on the final weekend.